Major drug insurers like United Health Group, CVS Health, and Humana make estimate bids to Medicare for reimbursement for the cost of Part D prescription drug benefits. From 2006 until 2015 the Wall Street Journal examined industry records and found that insurers reaped an additional $9 billion from overestimates of drug insurance costs.

From 2010 to 2017 overall Part D spending rose faster than all other Medicare components by 49 %. The bids from insurers include their profit margins and administrative costs. Medicare reimburses the firms monthly. When the year ends, Medicare audits the estimate totals versus the actuals and requests the overpayments be returned. However, the way the payment terms are setup the insurers are not required by pay the full amount of the overestimate. In 2015 insurers overestimated their Part D costs by $2.2 billion and were allowed to keep $1.06 billion.

The size and continuous overestimate pattern seems unusual. The overestimates are extraordinary to the tune of a million to one according to Memorial Sloan Kettering analysts who completed record examinations for The Wall Street Journal. Peter Bach, director of Sloan Kettering’s Center for Health Policy and Outcomes, noted, “Insurance companies use heaps of data to predict future spending. If truly unpredictable events were blowing up their statistical models, the proportion of overestimates to underestimates would be closer to 50/50.” Dr. Bach concluded, “If they start missing in one particular direction over and over they are doing it on purpose.”

The
chronic overestimates are particularly a problem in the direct subsidy part of
the program as the following chart shows versus the reinsurance program where
estimates are far more accurate.

Sources: Medicare, The Wall Street Journal – 1/4/19

Congress
designed the program in 2003 where the federal government and seniors would pay
for drug insurance while the program would be operated by private
companies. Legislators were concerned that
insurers would not want to participate so they allowed for companies to hold
back overestimated reimbursement funds.
The private companies bear all the risk in the direct subsidy program,
yet in the reinsurance program for high cost drugs Medicare bears the risk on
underestimates causing losses.

Insurers
can gain major benefits by overestimating on the routine drug costs they
cover. Companies can keep any overestimated
funds up to 5 % of their guess. In some
cases they can keep more than 5 % based on a Medicare formula. Medicare steps
in if the insurers experience a greater than 5 % loss in their estimate.

Next Steps:

From 2006 to 2015 Medicare spent $652 billion on the Part D program, with its cost increasing by 49 % over that period. Costs must be controlled by private insurers to keep premiums low for seniors and cost overruns limited for the federal government. There is too much reward built into the present direct subsidy program. Why not do as many corporations do for contracts that estimate costs and then must be reconciled at the end of the year? Return all the funds that are overestimated. Chronic overestimating companies would be hit with a penalty for overestimating reimbursement based on the opportunity cost of funds over reimbursed monthly payments. Medicare should reward the accurate estimating companies with positive ratings on their prices, and make clear who the violators are. Making the programs more competitive would bring down costs and require that companies be more accurate in their drug reimbursement estimates.

We see the pricing of drugs via insurers and pharmacy benefit companies as being too opaque to clearly design a fair pricing system. Congress needs to pass a ‘simple pricing’ sunshine bill to make drug pricing clear and accurate for all consumers and the government. Medicare should be able to use its leverage covering millions of seniors to negotiate a reduction in drug and insurance costs. California announced today a policy just signed by the newly installed governor, Gavin Newson, authorizing the California Medicaid administration to negotiate drug prices for all 13 million patients enrolled as a block and invites private employers to join the block. Drug companies and insurers need to shift their focus to make pricing programs more equitable for patients and payers or the face increased calls for price regulation.

(Editor Note: Insight Bytes focus on key economic issues and solutions for all of us, on Thursdays we spotlight in more depth Solutions to issues we have identified. Fridays we focus on how to build the Common Good. Please right click on images to see them larger in a separate tab. Click on the Index Topic Name at the beginning of each post to see more posts on that topic on PC or Laptop.)

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Major drug companies are lobbying Congress to reduce the $4 billion increase in costs due to raising the discount for seniors purchasing drugs at the ‘donut hole’ level in Medicare Part D to 70 % from 50 %. The provisions for an increase in the discount was included in a spending bill passed by Congress last February.

Pharma companies and major corporations with billions of dollars stashed overseas said that if tax rates were cut on dollars transferred to the U.S they would raise wages, increase R & D spending and reduce prices. Most companies did not deliver on their promises or benefits to patients either. Instead, they increased the size of their stock buybacks by 4 to 5 times in the case of the largest stock buyback company, Amgen.

Sources: SEC, The Wall Street Journal – 12/6/18

Only two of the top ten companies actually reduced share buy
backs since January of this year.
Corporations overall are expected to complete over $1 trillion of stock
buy backs by December 31st Goldman Sachs estimates.

Over a dozen Democratic members of the House ofRepresentatives sent letters to five top pharma companies with data showing new increases in drug prices while increasing share buy backs. The drug industry responded that they were reducing prices, increasing R & D spending and raising employee wages. Merck, CEO, Kenneth Frazier said in a reply, “We view the legislation (tax cut) as providing us with more flexibility to deploy capital in support of our strategy to invent new medicines that address key unmet medical needs, ultimately benefiting patients.” The reality is that prices for the most popular drugs are still going up.

AbbVie raised the price of Humira by 9.7 % in January the Democrats pointed out in their letter to the firm. Inflation for this past year is 2.4 % that drug increase is nearly 4 times the rate of overall consumer price increases in the U.S. economy. AbbVie sent a reply to the Congressmen outlining many programs using their tax cut funds including: a $1000 salary increase to non-executive employees, plans to invest $2.5 billion in capital projects in the U.S. over the next five years, $100 million healthcare and housing for people in Puerto Rico, an $100 million to the Ronald McDonald House to fund lodging for pediatric cancer patients and their families.

Next Steps:

Drug costs hit seniors particularly hard because they need the medication, and they are on fixed incomes. Drug companies have to do better by ending what the SEC called, “stock price manipulation”, before the Safe Harbor policy in 1982 allowed stock buybacks. Billions of dollars are wasted to goose the price of stocks to benefit executives and big investors. Investors are misled by earnings reports using fewer stock shares to compute earnings per share, often used to assess company performance. Patients are hurt by price increases, Humira costs patients $50,000 per year for the standard treatment if they have no insurance coverage. Stock buybacks by pharma companies must stop, the price gouging of patients and insurers needs to end.

Another economy that drug companies should adopt is to end direct-to-consumer advertising of prescription drugs. Over 150 countries do not allow prescription drug advertising, only the U.S. and New Zealand allow advertising directly to patients to create “pull” sales from patients requesting a drug from their doctor. According to Kantar media, drug manufacturers spent $6 billion on direct to consumer television advertising in 2017, a 64 % jump from 2012. The billions being spent on DTC advertising are better spent on reducing drug prices. We applaud the moves by AbbVie in raising employee salaries, donations to Puerto Rico and Ronald McDonald house, these are excellent steps. Many drug firms have foundations that offer patients with low incomes a way to obtain their medicines for free or little cost. The difficult aspect of most of these drug-for-free programs is they require large volumes of paper work, with major time delays when the patient needs to the drug immediately. Drug company executives need to see the light on what is happening, the price gravy train and waste of stock buyback funds gleaned from patients needs to end. Why wait for legislation? We appeal to CEOs – make the right moves now. See that taking responsibility for solving the cost crisis you have created will be far better for your firm, patients and insurers. You may get a solution you don’t want if you wait for Congress to pass legislation.

(Editor Note: Insight Bytes focus on key economic issues and solutions for all of us, on Thursdays we spotlight in more depth Solutions to issues we have identified. Fridays we focus on how to build the Common Good. Please right click on images to see them larger in a separate tab. Click on the Index Topic Name at the beginning of each post to see more posts on that topic on PC or Laptop.)

Image: blog.medicareright.org

The GOP Administration has announced a new drug price reduction program that will use a basket of prices that 16 nations pay for certain drugs in the Medicare Part B Plan (hospital and health services plans) to determine the price the federal government will pay. Biotech drugs which are extremely expensive, yet have high efficacy are to be targeted. The price reductions will be phased in over a 5 year period.

The difference between what the U.S. pays for many often prescribed medicines is huge as the following chart shows:

Sources: Bloomberg, The Washington Post – 10/26/18

How did U.S. prices get so much higher than other nations? Simply, the other countries negotiated tougher than we did. The pharma industry lobby in Washington spends tens of millions of dollars every year to persuade lawmakers and the White House to give drug makers complete pricing freedom. In effect, Americans are paying for the low prices other countries receive where the drugs are being sold with low margins or below margin. Pharma companies do not have a problem with this inequitable situation as long as they make money.

For example, in the U.S. Genentech, a division of Roche, prices a single dose macular degeneration drug Lucentis at $1000 while the same exact bio medicine – Avastin costs 10 times less. The firm says that the extra testing for the eye version requires a higher price. This premise disputed by scientists who worked in the Lucentis division and left in part due to the greed of management.

The administration is also planning on developing ways to give the private sector more leverage in negotiating prices with drug makers. Plus, HHS wants to create new policies that would reduce incentives for doctors to prescribe expensive drugs.

Next Steps:

We applaud the GOP Administration for taking on the drug companies and their money making over all else approach to drug pricing. The pharma companies most affected are stung by the plan and charged it with ‘socializing medicine’. We don’t see their gouging prices to Americans as fair and equitable, so controlling prices to reasonable margins is common sense not a value shift of the health industry.

A good place to start cutting costs is to end prescription drug TV advertising like over 100 countries worldwide ban – that would allow the firms to cut billions off prices each year. Next, they need to end stock buybacks which take shares off the market to increase share price.

Sources: Leerink Group, Market Watch – 10/30/18

These are the top 6 of all pharma firms wasting money on goosing their stock price with stock buybacks to increase stock compensation to executives while patients get hit with soaring drug prices. Nearly $100 billion dollars spent in the last year would go a long way to bringing down the price of drugs. When the industry cries it does not have funding for research it needs to start here and drug advertising if they tried harder to find the money they could. The executives just don’ want to take a pay cut and run their firm with reasonable margins, yet are fine with driving patients into bankruptcy or adding thousands of dollars of debt to patient accounts.

The GOP plan does not go far enough, all medicines purchased by Medicare and HHS should be negotiated. The negotiating authorization for HHS has been in numerous bills in Congress repeatedly defeated in by the drug lobby. Congress needs to pass the bill, and get moving with a fair drug pricing model, with complete transparency from insurers and pharmacies to patients. The federal government can learn from the assertive approaches many states are taking by looking a efficacy based pricing to bring prices within reason as well.

It is time the pharma industry took a hard look at its financial engineering and redesign a more equitable pricing and reasonable profit model for patients, hospitals and suppliers.

(Editor Note: Insight Bytes focus on key economic issues and solutions for all of us, on Thursdays we spotlight in more depth Solutions to issues we have identified. Fridays we focus on how to build the Common Good. Please right click on images to see them larger in a separate tab. Click on the Index Topic Name at the beginning of each post to see more posts on that topic on PC or Laptop.)

Image: consumersunion.org

The United States healthcare system is an expensive healthcare system compared to the OECD countries that spend 41 % less per person as a percent of GDP with a 4 year higher life expectancy rate.

Sources: The Daily Shot, The Wall Street Journal – 10/1/18

As U.S. spending continues to increase life expectancy rates are stagnant, simply not improving. Note that while OECD spending continues to grow at a much slower pace the life expectancy rate continues to climb. Americans are not getting the health care system performance that our European sister countries are achieving.

Even when looking at similar income level countries the cost difference is highly apparent in cost per capita.

What are OECD countries doing that the U.S. is not doing? For starters they do not have a private health insurance system which adds a profit motive to treatment, triages services to the higher income people and increases drug prices to consumers. Administrative costs in the U.S. are 8 % of the total healthcare spending versus the OECD countries which range from 1 to 3 %. One reason for the high administrative burden is administrative hiring was 650 % more than hiring of health services workers since 1970. Generalist physician salaries are significantly higher in the U.S. by 50% compared to developed countries. Drugs in America cost twice the average prices in comparable developed countries. The drug costs are distorted in the U.S. largely due to price controls in European countries so drug manufacturers charge as much as they can to U.S. providers and patients to make up the difference. Finally, another key reason is about 10 % of the U.S. patients are not covered by insurance. Which means they do not receive care from birth, let medical issues fester and go to emergency rooms for all their care (as U.S. law requires hospitals to serve all who come regardless of insurance). A study of the healthcare delivery system in Philadelphia showed that overall healthcare costs in the city could be reduced by 20 % if patients that needed care had services offered in doctor offices covered by insurance.

Next Steps:

We have recommended in previous posts that we have one insurance system in the U.S. as other developed countries. Administered by the Health and Human Services department, a health account would start as soon as a baby was born. Contributions by individuals, their employer and the government would go into one account. Private insurance could continue in those years where a worker is on the payroll of a company with benefits. In the event the worker is between jobs he or she would be covered by the government supported part of the plan. There would be only one formulary for drugs, and schedule for treatments and procedures. The administrative overhead could be cut to the 1 to 3 % range that other countries enjoy. Staffs in providers offices dealing with insurance idiosyncrasies and byzantine rules could be cut by 75 %. Drug companies would be prohibited from implementing stock buybacks which would make billions of dollars available to cut prices and innovate new medicines instead of lining the pockets of executives.

There are 3.5 million direct health care workers in the workforce today. The Bureau of Labor Statistics estimates that another 1 million direct health care workers will be hired by 2024. Direct healthcare workers include mostly all the assistant positions except a registered nurse: personal care workers, home health aides, and nursing assistants.

Sources: Bureau of Labor Statistics, Vox – 7/3/2017

Direct care workers often receive a wage below $15.00@hr. About 90 % of personal assistants receive $30,000 or less per year in income. One reason wages are so low is that 70 % of all long term care costs are paid by Medicare and Medicaid. These agencies reimburse care providers on a fixed cost basis. There is another reason. A high number of administrators are being hired rather than physicians, nurses or direct care workers.

When viewed from the perspective of healthcare spending per capita, administrator hiring was about 650 % more than overall per capita services. Healthcare is a lucrative sector for business, so they focus on hiring more administrators and managers rather than nurses and direct care workers. Healthcare providers can take the wages they pay too many administrators and give caregivers the wages they need to take are of themselves and their families. The byzantine way the healthcare industry is structured with insurance companies between the providers and workers when we only need one government agency to manage insurance is a good example. Most providers have who departments devoted to interacting with insurers and Medicare staff, which expensive to staff with specialized expertise due the idiosyncrasies of insurance policies.

Next Steps:

We clearly need to use computer systems and software to reduce the number of administrators and overhead in the system to the norm of per capita costs. End the use of private insurers except as contractors to a single government agency, use a standard reimbursement procedure with no middle layers of pharmacy benefit managers and end go to middle managers for insurance companies.

“The core need is to provide low cost effective health insurance for all people (like all developed countries do), so when illness strikes patients receive high quality care and become healthy again. Why do we need multiple insurance payers – private and the federal government? If we were running a corporation we would not have two accounts payable departments? We need to transition to individual health accounts that stay with the patient regardless of employment status beginning at birth. Here are ideas on how this transition could work.

Complete Analysis of ACA – We need to learn from the public exchanges that work – California’s public exchange has been quite successful covering new patients, and keeping costs reasonable for low income patients. Yet, we also need to look at why those exchanges like Oregon are not working well and expensive. Let’s summarize the analysis and publish the results so we can build a consensus around the solution, extending what works and recommendations for changes.

Priority One Cover the 9 Million Uninsured – those not covered by insurance need insurance now, we need to figure out how to cover 100 % of our citizens immediately. Offering a public option on the exchanges for basic health services and drug coverage would be a good start.

End State by State Coverage – state pools not large enough to make insurance work for all. With 360 million people in the US we can make our health insurance pool work to reduce costs. Plus, legislation needs to be passed to reverse the Supreme Court decision to allow states to opt out of subsidies. For example, Texas opted out on $10 billion subsidies leaving many low income families without insurance or very high premiums they cannot afford. Interestingly, a few months ago I talked with a small business office manager in Texas, she complained that ACA was not working (her firm did not offer health insurance), for her hourly staff. Obviously, one reason is that Texas opted out of the subsidy program. Using a national pool would help to spread out the disparities between regions in terms of the rising cost of insurance versus stagnant wage increases.

Create Individual Health Accounts – funding can be setup via a payroll tax, accrued to a personal national health insurance account when working (if they don’t have employer options – to be transitioned later). For individuals or families below the regional poverty level they would pay no health payroll tax. For those individuals who are not contributing to their health account, the federal government would fund a basic health and drug account by progressive taxes on wealthy individuals over $250k and the increase taxes on corporate profits. Corporations can offset the increased tax, by offering lower cost insurance, medigap plans or encouraging their employees to move to the basic national health insurance program.

End COBRA – by setting up health accounts regardless of being employed, there is no need for COBRA plans. Otherwise, for those unemployed to continue coverage often they have to pay soaring COBRA premiums up to 400 % of their employed premium rate. For this author, two major illnesses occurred when I was unemployed, often with the stress of being unemployed is the time we need health insurance. COBRA is another example where health insurers are charging outrageous rates to those who need the insurance badly but can least afford it. For the unemployed they could rely on basic health coverage in their individual health account.

Transition Employer Plans – convert employer plans over 4 years into a national personal health care account. Rollovers can be accomplished in a similar way to 401K to IRA rollovers (without the penalty for early withdrawal). Ending employer programs will cut a layer of administration in benefits departments that more rightly belongs to the individual regardless of employment status.

End Penalties For No Insurance – we want to to tax behavior we don’t want and support or subsidize behavior we do want. All Americans who have Social Security numbers should be able to enroll in a personal health insurance account, if they do not have a employer sponsored program. Parents can apply for a SSN for their child to be covered. A public insurance option should be offered to all those families not in employer sponsored programs. The public option run by Medicare is a basic health insurance program run similar to basic Medicare for seniors with medigap plans to cover the other 80 % of coverage needed.

Use the Medicare Drug Formulary – we don’t need multiple formularies and tiers of drug coverage. Medicare already provides one formulary which should be used as the industry formulary. We need to empower Medicare to negotiate all drug prices and health procedures with providers with provision for regional differences on procedures. A critical medication list can be created by Medicare for life threatening (Epipens) or serious chronic conditions (diabetes) capped at 5% profit for drug manufacturers.

End Stock Buybacks by Insurers – insurers need to end stock manipulation and the waste of stock buybacks. Companies like Aetna have spent billions of dollars on stock buybacks which would go a long way to reducing premiums and costs to patients.

Pricing needs to be transparent – similar to a mortgage disclosure statement. The explanation of benefits and drug claim form needs to be clear about the provider or drug price, any discounts and rebates, the price the insurer is paying, the price the provider is actually requiring, the price the pharmacy is paying and the exact out of pocket cost to the patient, with patient accruals in out of pocket and co pays toward insurance coverage.

Do it Without Waiting – let’s get progressive investors to back drug manufacturers that adhere to drug cost reasonable, critical med list, transparent pricing innovative insurance, publicize get more investors on board. Work with Wall Street to setup an ETF stock to focus on companies adhering to the progressive national health programs demonstrating good returns.

Awareness of What Works – A media campaign with surrogates, leadership in Congress, interest groups like the AMA, and the insurers to bring the American people along on the solution journey and to put pressure on Congress to pass the necessary legislation.

Health insurers would focus on medigap plans, taking risk out of innovative drugs to help speed them to market, vision and integrative medicine, personalized medicine, telemedicine – taking their layer out with reduce costs dramatically. They can be contractors to Medicare for transition to health accts. Or insurers can be contract administrators to Medicare, keeping costs low and utilizing their expertise.

Lets establish a lifetime health insurance program that provides good quality care, and low cost medications for all Americans.”

(Editor Note: Insight Bytes focus on key economic issues and solutions for all of us, on Thursdays we spotlight in more depth Solutions to issues we have identified. Fridays we focus on how to build the Common Good. Please right click on images to see them larger in a separate tab.)

Photo: healtheconomics.com

Several states including New York, Vermont, Massachusetts and California have begun initiatives to take on drug companies for the their exorbitant prices of new drugs. New York is taking a price versus effectiveness approach with a new drug called Orkambi for cystic fibrosis. The New York state Medicaid department is demanding a lower price as it is not clear the drug helps patients with the disease better than existing treatments. Vertex, the manufacturer of Orkambi made $1.3 billion in sales from the drug which is a high sales level for a drug that is marketed to only 26,000 eligible patients. Vertex prices Orkambi at $272,000 for one year of doses. The drug costs so much that some insurers pass on the high costs to patients in some cases $3000 per month.

Dr. Steven D. Pearson, President of the Institute for Clinical and Economic Review is working with New York officials on a state board case against Vertex to bring the price down. The state board found that Orkambi did not meet the effectiveness claims by the manufacturer so New York should receive a 77 % discount. Dr. Pearson said his evaluation of the costs indicated that the drug could be discounted by 77 %.

The U.S. is alone of all major developed countries in not directly regulating drug prices. In Europe health services officials do not accept high prices for drug with marginal value and negotiate using their purchasing power to bring the price down. Congress has consistently bowed to the drug lobby by not speeding generic drugs to the market and not including in any drug bill the power for Health and Human Services to directly negotiate the price of all the medications it covers for U.S. patients.

Time is up for the drug companies and insurers gouging patients with soaring prices while they make hefty profits and executives pocket huge compensation packages. Drug companies need to stop buying back their stock, wasting the money that could be used to bring the price of their drugs by billions of dollars. Congress needs to give HHS the power to negotiate prices and effectiveness limits on drugs of dubious value the way most developed countries in the world do today. Over the past decade pharmaceutical companies have found that their exorbitant prices have not stuck in Europe or other developed country market, so they jack up the price of the medication in the U.S. where there is little regulatory constraint.

In an unusual development in the Senate, senators from the Republican side like Sen. Ted Cruz – (R- TX) to Democrat Sen. Diane Feinstein (D – CA) agree that the process of converting brand name drugs to generics needs to be sped up and reduce drug costs. With 23 co- sponsors the CREATES Act would require brand name drug companies to provide large enough quantities of samples of their drugs to generic manufacturers in a timely manner and that are safe. At the present time brand name drug manufacturers often do not supply the quantities necessary or block access due to safety concerns – unnecessarily delaying the conversion of a brand name drug to a generic. The bill provides a remedy for generic manufacturers by allowing them to sue the brand name manufacturers for not providing the necessary samples.

Sen. Patrick Leahy (D-VT) a bill sponsor, says the Congressional Budget Office estimates the bill would save the federal government about $3.8 billion over a decade in drug costs. The Congressional Budget Office and the Generic Pharmaceutical Association estimate a total savings of $250 billion in 2013 by using generic drugs versus brand name drugs.

Source: CBO, GPha – 2014

As we have noted before drug companies are running their companies focused on making unreasonable levels of profit through $50 billion stock buy backs to increase executive and shareholder compensation and paying $1 billion a year in direct advertising to consumers for prescription medications. If the drug companies allocated these wasted funds toward price reduction we would see a dramatic reduction in drug prices. The CREATES Act is a good bi-partisan way to at least begin to tack down agreement on drug price reductions in a fair way.

The Administration last week announced a series of proposals to reduce the price of medicines for seniors and the general patient population. The policy initiatives include: review ways to speed generic drugs to market, placing trade restraints on countries until they pay their fair share of a drug’s costs, lowering out of pocket expenses for patients, require drug companies on TV ads to list the price of the drug advertised, updates to a Medicare drug pricing monitoring tool, and not until 2020 more transparency on drug list prices to consumers, drug rebates from manufacturers will be passed through to consumers, considering a requirement that middlemen like pharmacy benefit managers act in a fiduciary role for clients (consumers), and a report on how to use the Medicare Part D (drug) plan to negotiate for services Medicare Part B (services).

When investors and drug and biotech companies saw how vague the plan was, and the fact it did not give Medicare the right to negotiate prices stock prices went up after the 11 am announcement:

Sources: Money.net, Axios – 5/11/18

Today, biotech stocks were up another 1.0 % and health insurers Aetna and United Healthcare saw stock price moves up almost 2.0 %.

POTUS promised repeatedly during his 2016 campaign that drug companies were ‘getting away with murder’ on pricing. He even promised to Rep. Elijah E. Cummings (D- Maryland) in March of 2017 that he would seek Medicare authorization for drug price negotiations. He did not provide for direct negotiation by Medicare in this set of proposals, basically selling out the American people to the drug and biotech industries.

Next Steps:

“Until we get closer to policy solutions that address the ability of drug manufacturers to set whatever price they want and increase prices year after year, we may only be scratching the surface of this problem.” — Juliette Cubanski, a health-care expert with the Kaiser Family Foundation.

Ms. Cubanski perfectly outlines the problem; drug company pricing power is out of control, shows not restraint and little regard for the common good. Drug companies are making money off of people that are sick or dying. They have a social responsibility for the common good of all people to ensure their drugs are safe and offered at the lowest possible price. We have proposed previously and continue to believe that just showing list prices for advertised drugs is not enough – prescription drug advertising on TV should be banned as it is in all countries of the world except New Zealand. Banning advertising would give the drug companies at least $ 1 Billion per year they could put into research and development or to cut the cost of drugs. The pharma industry is one of the worst offenders in manipulating stock prices in a misleading way, and juicing executive compensation with stock buy backs. Companies like Amgen and Abbvie plan to buy back shares totaling $20 billion in 2018 which could be better used to lower prices or increase productivity, if the whole industry is considered it is over $50 billion.

Source: Company filings, Axios 5/11/18

Stock buy backs can be banned by an SEC policy change and do not require Congressional approval it should be done now covering all health industry companies not just pharma companies.

We are pleased to see the Administration moving on stock rebate discounts going directly to consumers as we have noted in the past. Yet, these proposals are so vague, are missing timelines and will need to be supported by officials in the Health and Human Services organization whose Director came from Eli Lilly. What we think will really happen is these proposals will be used as PR pieces to the voters for the mid-term elections while industry lobbyists water down the key provisions in back rooms. Certainly, the drug companies and investors see nothing to be concerned in the POTUS plan – so if it doesn’t hurt their valuation then these policies may be really don’t really have any bite. We want our drug industry to be profitable and thriving but at the same time it needs to take social responsibility for its products. Since the industry can’t seem to focus on a fair profits for its products, our government needs to bring these companies into alignment on the common good for all the people.

(Editor Note: Insight Bytes focus on key economic issues and solutions for all of us, on Fridays we spotlight in more depth solutions to issues we have identified. Please right click on images to see them larger in a separate tab.)

Image: Kaiser Health Network

Almost 70 % of all employers who are the payers for employee drug insurance programs do not pass along the rebates they receive from insurers who receive them from drug manufacturers. Employers say they use the funds to reduce costs. Though we do see corporations passing along the costs to employees with higher deductibles according to the Kaiser Family Foundation research report discussed in our blog on Health Insurers and keeping the rebates to themselves.

What is really happening is drug insurers like United Healthcare, are offering discounts to employers who can pass them along to employees but they don’t pass the dollars along. Instead they say they put them into reducing the costs of drugs overall. Yet, that is not happening, as a Kaiser survey found that with drug costs going up 58 % from 2006 to 2016 yet the cost of worker contributions went up 78 %. Companies are picking up a health insurance reduction premium saving it for themselves of 20 %.

When companies reduce health costs, the result is increased profits (made from increasing costs to employees), which increase the value of company stock which is held mostly by executives and shareholders who are in the top 10 % in income.

Next Steps:

We applaud that United Healthcare is going to begin offering next year direct to consumer drug rebates for a subset of their employer based programs. Yet, that not enough, we see a need for legislation calling for transparency in drug pricing and insurance similar to the laws in place on bank mortgages disclosing the real cost of a home loan. Second, we recommend legislation that requires drug insurers pass along any drug manufacturer rebates, discount or other cost savings directly to consumers to prevent the cost reductions from being syphoned off by employers.

In the end, the added layer of insurers we don’t need when we already have the Medicare program in place for 55 million Americans and 44 million of those are enrolled in Medicare Part D for drug insurance. We have one drug formulary in Medicare, let’s use it, let the Medicare administration to directly negotiate drug prices, end stock buybacks by drug companies and direct advertising of prescriptions drugs, then we would see a significant reduction in drug costs.

The Health and Human Services administration just announced that the average premium for patients on the health insurance exchanges will increase by 25 % in 2017. For those covered in employee insurance plans they are being squeezed between stagnant wages and increasing premiums and high deductibles. The health insurers have a business model that creates profits for them, but creates gaps in coverage (as when a worker is unemployed) with high premiums and high deductibles. Insurers spend billions of dollars on stock buybacks to drive share prices up to increase executive stock compensation. Plus, they spend millions on lobbying Congress to keep their business model in place. These monies could be better spent bringing costs down and reducing premiums. In the final analysis as a country, we don’t need two accounts payable departments – private and Medicare. Let’s move to one single payer system, though it may take years to implement. The Action: Cover the remaining 9 million uninsured with a public option on exchanges, end state by state plans and replace them with a national insurance pool of 360 million, create individual health accounts funded by payroll deductions from salaries for workers and for the uninsured federal basic health and drug insurance would be offered, end COBRA accounts by implementing national health insurance accounts available regardless of employment status, transition employer plans over to health accounts over a 4 year period similar to 401k rollovers into IRA accounts, end penalties for not having health insurance, use the Medicare drug formulary for the industry, end stock buy backs, require full disclosure on health and drug pricing. To implement and guide development of the new health account program we should look at Affordable Care Act exchanges that work like California and those faced with challenges like Oregon. Plus, let’s enlist our progressive investor partners to build new health insurance business models and organizations necessary to make this transition successful.

The Story:

Last week, this author received in the mail a notice from his drug insurer announcing rates for 2017 – a 38 % increase in a standard medication because it was moved to a non-plan brand tier from a generic (it is still generic) and premium increase of 33 %! Recently, my wife made an inquiry about coverage for one her medications where the insurer said her medication was covered was covered but she would have to pay 100 % of the cost because of the tier it was on. What kind of double talks is this? Related to health care, prior to the Affordable Care Act my son couldn’t afford doctor visits because he didn’t have insurance – he would have to pay $150 for a visit instead of a $10 copay. Fortunately, he didn’t have much income so MediCal helped out. It seems that most families or someone you may know has had an issue with a health insurer. Yet, this business model for insurers stays in place. Insurers have designed an inequitable structure to ensure they make money, while those with no insurance or high deductibles are paying exorbitant fees.

How big is the problem with drug and health insurance? According to the Kaiser Family Foundation insurance costs are going up for those under employer sponsored plans too –29 percent of all workers were enrolled in high deductible plans up from 20 percent in 2014. From 2006 to 2016 workers incurred a 58 % increase in premiums for employer sponsored plans. (click on image to enlarge)

Under the Affordable Care Act (ACA) corporations can move insurance plan costs over to employees for their health insurance and not be penalized. High deductible plans can cause a barrier to care, because patients looking to reduce costs do not go to their doctor or purchase the medicine they need, resulting in more serious illnesses later. This means that while premium costs maybe held in check, high deductibles are dramatically increasing the costs to patients while middle class worker income has stagnated since the mid 1980s. Middle class workers and their families are caught in a wage – health cost squeeze, while drug and health care provider executives make 290 % of an average worker income. The Commonwealth Fund, reports that workers with employer plans spent an average of 6.5 % of their income in 2006 on premium fees and deductibles, this figure soared to 10.5 % by 2015. The squeeze between wages and health care costs is felt most acutely in those states with lower wages. For example, in Florida the average worker spent $16,000 in premiums and deductibles per year, in Massachusetts their health costs were $18,000. Yet, the median income in Florida was $43,401, versus $73,015 in Massachusetts – highlighting the huge squeeze felt in lower income states where wages have not kept up with health costs

Finally, the federal government reports that while another 1 million people will be covered by the public exchanges in 2017 due to the major insurers dropping out, average premiums will be raised by 25 %! For example, Aetna announced that it was dropping 11 states from its plans due to losses of $430M since January 2014. Aetna wants the game played by its rules. Last summer, Aetna told the DOJ that it would bow out of state exchanges if it did not approve their merger with Humana, Aetna also spent $1 billion in stock repurchases in 2014 and approximately $750 million in 2015. Anthem has announced that while it is not repurchasing stock now with its pending merger with Cigna, it still has authorized $4.7 billion dollars! Stock repurchases manipulate the stock price (to drive up price); they do not reduce costs, innovate new services, or compensate employees. In 2014, Humana repurchased $500 million in stock driving the price up by one cent over their earnings target of $7.50 per share entitling CEO Bruce Broussard to a $1.68 million bonus. Middle class workers are caught in squeeze as premiums rise while executives use billions of dollars to increase their compensation that could be used to reduce premium prices.

The success of the public insurance exchanges while contingent on insurer support requires strong state leadership. California supported the public exchange program where 92 % of patients can choose among three or more plans, with increases averaging 15 % for 2017. Most Covered California plan consumers receive premium assistance and qualify for subsidies. Other states like Texas, fought the public exchange plan, and did not accept $10 billion in subsidies over 10 years which left many low income Texans without coverage.

The ACA has been a success with 21 million people gaining coverage, while another 9 million remain uninsured, the lowest number on record. Yet, the pricing and coverage model is wholly inadequate for patients to hold premium costs down and health service providers to manage their businesses effectively while ensuring a high quality of health care.

So how does drug and health insurance work? Drug companies set a price then negotiate an agreement with the health insurer for different tiers of pricing generic (lowest), preferred brand and so forth. The top tier is usually completely uncovered. The insurers negotiate for rebates and discounts to drive patients to certain drugs that the drug manufacturer wants to increase sales, or where they have the highest profits margins. Drug prices increased by 12 % last year, however the insurers saw drug costs increasing by only 2.8%, according to IMS Health. The drug store submits a claim under your plan when you want a prescription filled, the price they submit is high, and not what they receive (it looks big to have the consumer think the insurer is paying the drug store a lot) there are rebates and discount lists, then there is the cost to the consumer as a member. Finally, the plan supposedly pays part of the net amount, but most drug plans make the net figure your out-of-pocket cost. The pricing structure is completely opaque to the patient.

Health provider costs are negotiated as well. On an Explanation of Benefits statement the patient sees the amount the service provider charges, which is not the price the insurer pays which is usually a much lower cost reimbursement. If the patient has no insurance the ‘retail price’ of the service provided is due from the patient. Often these retail costs fall on those patients least able to pay – those with low income or without insurance. Retail costs can be exorbitant for example, an MRI may cost the insurer $1000, while the provider retail cost to the uninsured patient is listed at $10,000. Incredibly, uninsured patients are forced to pay the most for the health services! There is an obvious message here – ‘we don’t care about uninsured patients and we are going to stick prices to them’. For most unemployed patients private plans and private plans on the public exchanges have high premiums, high out-of-pocket or high deductibles. This approach of high premiums, out of pocket and high deductibles don’t work for the consumer!

Insurers have worked hard to keep their business model in place with Congress, Aetna spent over 23 million dollars since 2010 lobbying Congress on legislation that impacted their business, according to the Center for Responsive Politics. Aetna employed 37 lobbyists, with 75 % enjoying a revolving door between government positions and lobbying on behalf of Aetna. The health insurance industry has spent over 61 million dollars in lobbying efforts between 2010 and 2016. These insurer lobbyists are not representing patients.

When the health insurers; Aetna, Cigna, Humana, Anthem threaten the DOJ with leaving the public exchanges and then leave as they did last month, they are clearly undermining the goals for the ACA. They were upset with DOJ for suing all four firms to stop their planned mergers. We need an attitude shift here, how can they make insurance work for all of us.

We have come a long way with the ACA and concessions by the insurers, but they continue to focus on the healthiest patients, increases in deductibles, increasing profits and maintaining high executive salaries. This is all at the cost of patients – all citizens have a right to good, high quality healthcare throughout their life.

The Action

The core need is to provide low cost effective health insurance for people, so when illness strikes patients receive high quality care and become healthy again. Why do we need multiple insurance payers – private and the federal government? If we were running a corporation we would not have two accounts payable departments? We need to transition to individual health accounts that stay with the patient regardless of employment status beginning at birth. Here are ideas on how this transition could work.

Complete Analysis of ACA – We need to learn from the public exchanges that work – California’s public exchange has been quite successful covering new patients, and keeping costs reasonable for low income patients. Yet, we also need to look at why those exchanges like Oregon are not working well and expensive. Let’s summarize the analysis and publish the results so we can build a consensus around the solution, extending what works and recommendations for changes.

Priority One Cover the 9 Million Uninsured – those not covered by insurance need insurance now, we need to figure out how to cover 100 % of our citizens immediately. Offering a public option on the exchanges for basic health services and drug coverage would be a good start.

End State by State Coverage – state pools not large enough to make insurance work for all. With 360 million people in the US we can make our health insurance pool work to reduce costs. Plus, legislation needs to be passed to reverse the Supreme Court decision to allow states to opt out of subsidies. For example, Texas opted out on $10 billion subsidies leaving many low income families without insurance or very high premiums they cannot afford. Interestingly, a few months ago I talked with a small business office manager in Texas, she complained that ACA was not working (her firm did not offer health insurance), for her hourly staff. Obviously, one reason is that Texas opted out of the subsidy program. Using a national pool would help to spread out the disparities between regions in terms of the rising cost of insurance versus stagnant wage increases.

Create Individual Health Accounts – funding can be setup via a payroll tax, accrued to a personal national health insurance account when working (if they don’t have employer options – to be transitioned later). For individuals or families below the regional poverty level they would pay no health payroll tax. For those individuals who are not contributing to their health account, the federal government would fund a basic health and drug account by progressive taxes on wealthy individuals over $250k and the increase taxes on corporate profits. Corporations can offset the increased tax, by offering lower cost insurance, medigap plans or encouraging their employees to move to the basic national health insurance program.

End COBRA – by setting up health accounts regardless of being employed, there is no need for COBRA plans. Otherwise, for those unemployed to continue coverage often they have to pay soaring COBRA premiums up to 400 % of their employed premium rate. For this author, two major illnesses occurred when I was unemployed, often with the stress of being unemployed is the time we need health insurance. COBRA is another example where health insurers are charging outrageous rates to those who need the insurance badly but can least afford it. For the unemployed they could rely on basic health coverage in their individual health account.

Transition Employer Plans – convert employer plans over 4 years into a national personal health care account. Rollovers can be accomplished in a similar way to 401K to IRA rollovers (without the penalty for early withdrawal). Ending employer programs will cut a layer of administration in benefits departments that more rightly belongs to the individual regardless of employment status.

End Penalties For No Insurance – we want to to tax behavior we don’t want and support or subsidize behavior we do want. All Americans who have Social Security numbers should be able to enroll in a personal health insurance account, if they do not have a employer sponsored program. Parents can apply for a SSN for their child to be covered. A public insurance option should be offered to all those families not in employer sponsored programs. The public option run by Medicare is a basic health insurance program run similar to basic Medicare for seniors with medigap plans to cover the other 80 % of coverage needed.

Use the Medicare Drug Formulary – we don’t need multiple formularies and tiers of drug coverage. Medicare already provides one formulary which should be used as the industry formulary. We need to empower Medicare to negotiate all drug prices and health procedures with providers with provision for regional differences on procedures. A critical medication list can be created by Medicare for life threatening (Epipens) or serious chronic conditions (diabetes) capped at 5% profit for drug manufacturers.

End Stock Buybacks by Insurers – insurers need to end stock manipulation and the waste of stock buybacks. Companies like Aetna have spent billions of dollars on stock buybacks which would go a long way to reducing premiums and costs to patients.

Pricing needs to be transparent – similar to a mortgage disclosure statement. The explanation of benefits and drug claim form needs to be clear about the provider or drug price, any discounts and rebates, the price the insurer is paying, the price the provider is actually requiring, the price the pharmacy is paying and the exact out of pocket cost to the patient, with patient accruals in out of pocket and co pays toward insurance coverage.

Do it Without Waiting – let’s get progressive investors to back drug manufacturers that adhere to drug cost reasonable, critical med list, transparent pricing innovative insurance, publicize get more investors on board. Work with Wall Street to setup an ETF stock to focus on companies adhering to the progressive national health programs demonstrating good returns.

Awareness of What Works – A media campaign with surrogates, leadership in Congress, interest groups like the AMA, and the insurers to bring the American people along on the solution journey and to put pressure on Congress to pass the necessary legislation.

Health insurers would focus on medigap plans, taking risk out of innovative drugs to help speed them to market, vision and integrative medicine, personalized medicine, telemedicine – taking their layer out with reduce costs dramatically. They can be contractors to Medicare for transition to health accts. Or insurers can be contract administrators to Medicare, keeping costs low and utilizing their expertise.

Lets establish a lifetime health insurance program that provides good quality care, and low cost medications for all Americans.

(Editor Note: References for this article appear in the Research section of this site.)